Because of financial tweaks to the Bankruptcy Code, as of April 1 you are a little less likely to have to repay some of your recent use of credit cards.
This is a lesson in how the law really works in bankruptcy court. It show that winning or losing a dispute depends on how the legal cards are stacked for or against you.
The Honesty Principle in Bankruptcy
Here’s a legal principle that we can all rally around: debtors should be able to discharge (legally write off) a debt honestly incurred, but not one dishonestly incurred.
A good example of a dishonestly incurred debt is a cash advance made on a credit card or line of credit which the debtor clearly does not intend to repay because he or she clearly intends to file bankruptcy a short time later. That’s dishonest because every use of a cash advance is legally (and morally) tied to a promise to repay that cash advance.
But life often isn’t that clear. In the months before filing bankruptcy, most people are trying to do what they can to avoid filing. Or at least they are hanging in there trying to manage, hoping—sometimes sensibly and often not very realistically—that something will happen to improve their finances. If they take a cash advance or use a credit card, it’s often done to avoid or at least put off filing bankruptcy. That use of credit may have shades of desperation, or recklessness, but it’s seldom coldly, clearly, intended to cheat a creditor.
The Law Has to Separate the Honest and the Dishonest
So the law has the challenge of drawing a line between the honestly incurred cash advance or use of a credit card—where the debtor intended to pay it back at the time it was incurred, but then eventually wasn’t able to—and the dishonestly incurred one—where the debtor did not intend to pay it at the time it was incurred.
And the challenge is one of evidence. Months or even years later, how accurately is a debtor going to recall his or her specific intention at the time of one particular cash advance or credit card use? Especially given that it could well have been a financially and emotionally tense time, memory could easily be limited or selective.
And since, overall, creditors have the burden of showing why any debt should not be discharged, how can a creditor prove that a debtor did not intend to pay a debt when the only direct evidence of that is whatever is in the debtor’s memory?
Stacking the Deck with a Presumption of Fraud
So the law cuts through this problem by stacking the deck for the creditors.
Congress arbitrarily picked a length of time before the filing of a bankruptcy, and said that if a debtor does a cash advance during that time, then the debtor will more likely have to pay back that cash advance. I say more likely because the law does this by in effect playing with the rules of evidence. It says that if the cash advance happened within 70 days before the bankruptcy filing, then that cash advance is “presumed to be nondischargeable.” It’s presumed to be based on debtor’s fraud or misrepresentation. It “shifts the burden of proof” from the creditor to the debtor, now requiring the debtor to bring forward convincing evidence that his or her intent at the time was in fact to pay back the cash advance.
On the debtors’ behalf, Congress also decided that this presumption would only kick in if the cash advance was more than a certain amount– if the cash advance (or multiple advances) within that 70 day period was more than $925. If less than that, the creditor still has the burden of proof.
That’s for cash advances. There’s the same kind of presumption of fraud or misrepresentation for credit card purchases of “luxury goods and services,” this time with a 90-day look-back period. And the trigger amount for this one to kick in is more than $650 of such purchases. So if within the 90 days before filing bankruptcy, less than that amount of “luxury” purchases were made, there is no presumption against the debtor, and the credit still has the burden of proving that the debtor did not intend to pay for those purchases.
And before you say that you didn’t use your credit card to buy a Rolex watch or Tiffany jewelry, the Bankruptcy Code has a misleadingly broad definition of “luxury goods and services”—whatever is not “reasonably necessary for the support and maintenance of the debtor or a dependent of the debtor.” Hard to say exactly where that line is drawn, but essentially a “luxury” anything that is not “necessary,” which could include just about anything.
How the Deck-Stacking Works
If your cash advance(s) with any creditor during the 70 days before filing totaled more than $925, there’s a good chance that you will have to pay back those cash advances. That’s because the attorney fees for defending this would likely cost more than the amount of your cash advances. This assumes that the creditor complains about this by its quick deadline to do so—usually just 60 days after the “meeting of creditors.” If the creditor does not complain in time, you would not have to pay—the cash advances would be discharged.
Same thing with “luxury” purchases during the 90 days before filing with any creditor totaling more than $650—you’d very likely have to pay them if the creditor complains in time.
On the other hand, if you had very solid evidence that you had no intention of filing bankruptcy at the time you did the cash advance(s) or used the card, it might be worth fighting against the presumption. An example would be the existence of a subsequent major unexpected event which forced you into bankruptcy. But it would have to be strong enough evidence to convince the creditor to quickly drop the case, to avoid you incurring a lot of attorney fees.
Be aware—with either cash advances or “luxury” purchases, it’s not the entire debt owed to the creditor that is in play, but only the amounts incurred during the stated 60 or 90 days.
Un-Stacking the Deck by Waiting Out the Presumption Periods
If you are able to hold off on filing bankruptcy, one way to avoid these presumptions is to wait until any cash advances totaling more than $925 are more than 70 days old, and until any “luxury” purchases totaling more than $650 are more than 90 days old. Creditors can always accuse you of incurring debts without intending to repay them, but it usually costs them lots more in attorney fees without the benefit of the presumption, and their odds of losing the dispute are much higher. So they are less likely to challenge the discharge of a debt in the first place.
Why the Risk of Being Accused of Fraud is Now a Little Less
On April 1, the threshold for the presumption of fraud for cash advances went from $875 to $925, and the threshold for “luxury” purchases went from $600 to $650. So as of April 1 you could incur a little more of these kinds of debts within the respective 70 and 90 days and not be within the presumption of fraud. Every little bit helps.